China's flag and the Union Jack flag merging together

Hawk-i - 27 March 2019

Horse treatments for a bear market: The London-Shanghai Stock Connect

For a number of years, London and China have been working together to try and create The London Shanghai Stock Connect. But what does this bring to the industry? 

Author of article:

Fabio Stella

China Head of Sales & Business Development

Three years have now passed since the first announcement of laying the foundations for the London Shanghai stock connect, in what the Chinese would still describe as a short span of  time, their national equity market has burned 5 trillion as of September 2018. 2019 outlooks for Q1 closure and Q2 definitely look brighter but uncertainties on the launch date for the Shanghai – London board bridge risk to waste a “golden opportunity” right when both sides of the table would crave for positive developments. 

As Thomson Reuters reported last year, only 2 interested parties have taken initiatives to list under the London Connect, namely the Hong Kong & Shanghai Banking Corporation and Huatai Securities, while smartphone producer (and much more) Xiaomi averted related plans to opt for an HK listing instead and fashion powerhouse Burberry are taking a closer look at the opportunity.

Well aware of the need to face the opportunity with care, the Shanghai Stock Exchange has already provided a list of Q&As to foreign investors and fund managers. The page goes from describing the instrument offered by the London connect (Chinese Depository Receipts and Global Depository Receipts) to the underlying significance of the initiative and tries to anticipate the major concerns coming from a Foreign audience.

Under the current LSE-SSE scheme and unlike other depository/receipt schemes, the planned instruments won’t be interchangeable with related-shares, in a way that investors will only be able to trade those for cash instead of convert notes into shares or titles for those stocks. The mechanism has been clearly designed to curb potential capital flights in a moment when the RMB is already under pressure against the luring USD. 

Of course the program aims at making it easy for Chinese companies and Tech Unicorns to sell tradable share backed securities in the London Stock Exchange, while UK listed entities will be able to offer similar depository receipts to investors back in China via Shanghai. The scheme appears to be focusing on China’s Tech growth given the fact that the possibility to raise new funds via the London stock connect will only be available for the Chinese listed entities.

Dust under the flying carpet

As corporate services providers, whenever assisting clients and contacts reaching out to our Greater China offices about opportunities and investment in the Chinese stock exchange (Shenzhen and Shanghai), issues on the table are always related to:

  1. The scarcity of trustworthy local sources of information;
  2. The general distrust into controls and regulations at CSRC and market authorities’ level in a system where accountability doesn’t lie on the higher throne of national interest;
  3. The volatility of a market made of Monday buyers/Friday sellers where “two-thirds of these new stock investors in China quit school before the age of 15, and one third did so before 12. Six percent of them are illiterate.”
  4. The uncertainty related to sudden intervention by the State under the Party’s influence (it happened so when the market was threatening savings of a lifetime in plenty of households) or the push for reforms.

All the above obstacles could, of course, be overlooked whenever aiming at the greater target of cashing on China’s GDP growth back in 2015-16 but what about now amidst commercial scrambles with Trump’s America First and a slowdown towards Xi Jinping Chinese dream of a reasonable and more affordable growth?

Structural Issues in the Chinese Market

The real standoff of the Chinese economy lies at the basis of China’s form of government itself, in front of a series of tight regulations and controls related to pre-IPO, IPO and de-listing formalities, valuable companies have decided to list abroad (London, Singapore, New York, Hong Kong) and the CSRC was left with the usual crane of Provincial (provinces are the equivalent of European regions/US states) and Municipal State Owned Enterprises taking as much as possible of the yearly quotas to reach Chinese investors.

As the European Chamber of Commerce in China has trumpeted in several occasions, the Chinese economy moves at a pace that is way higher of the ones of intermittent reforms and openings, the first victims being foreign-invested groups and the private sector of SMEs in general. Abrupt steps towards long awaited issues like the Foreign Investment Law passed this month risk to be seen as emergency cards played at a table where China is forced to seat instead of reasonable solutions applied by a wise legislator, the result being labels like “too little too fast” coined by critics of that bill among the foreign business community.

Hope travels on the net

Recent steps aiming at offering a safe harbour for China Tech firms listed abroad represent the regulation that can really funnel attention and renewed trust among Chinese investors unable to access the 27 companies currently pitching the online/innovation sector to the outside world. As Saxo bank reported, those Tech27 currently outperform China Tech stocks, the Nasdaq, CSI 300 and H shares altogether and represent one of the last rockets back to initial heights.

The recent launch of Shanghai “Nasdaq-style” Technology & Innovation Board has already boasted the creation of domestic funds to cash out on relaxed regulations for listing and the possibility for pre-profit companies to float like in the US and Hong Kong in a moment when China domestic stock market seems to have re-gained momentum after years of lows.

The Future of Hong Kong

Looking at one of the main sources of information for UK’s previous stronghold in the South China Sea, the South China Morning Post has instead reported that “the link with London is being viewed as a symbolic move rather than a substantive measure aimed at inviting more foreign investment participation”. Frictions on the stock connect with Shanghai are mainly targeting the fact that Hong Kong itself launched a very similar instrument allowing to more than 1600 Chinese stocks an access to foreign investor’s portfolio via the HKEX connect. 

In light of the newly announced Outline Development Plan for the Greater Bay Area (an integrated region including Hong Kong & Macau together with Guangdong Province), the decision for London to go all the way at the heart of the Chinese Mainland’s financial empire seems a well weighted one.

The Belt & Road Initiative right after Brexit?

In order to draw a line on the opportunities brought-up by the SSE-LSE stock connect, one has to recognise that recent turbulence in China’s growth engine given Xi Jinping route to the New Normale (i.e. sustainable pace) do not hold arguments against the relevance of the Middle Kingdom’s economy in the last 20 years. Its share of global GDP tripled from 2000 to 2016 and is projected to reach 19% within the present year turning its slide of the cake into something too big to be absent from an investor’s portfolio.

While London eyes short-term disruption into its economy following a potentially delayed Brexit, an increased cooperation on the fin-tech and infrastructural sector with China, the trumpeted “Golden Relationship” for 2019-2020 and a pivotal role for UK firms along the Belt & Road Initiative may provide a soft landing and a longer term where to seek a positive outlook.

Contact us to find out how Hawksford can help your business.

Contact Fabio

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